Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Silver Is Down 11 Percent While Gold Holds Above 4000
Transcript
- Lucas: So silver is down more than eleven percent over the last five trading days, and that is not a typo. Luna: Eleven percent in a week. That is a serious move, especially when gold is still sitting above four thousand dollars. Lucas: Right. Gold is off about five percent over the same stretch, which is a pullback, but it's nothing compared to the bloodbath in silver. And I think the divergence tells us something interesting about what's happening under the hood. Luna: Let's start with the obvious — silver is both a precious metal and an industrial metal. So which leg is causing the pain? Lucas: It's the industrial leg, and it's not hard to see why. Silver is used heavily in solar panels, electronics, soldering, batteries. And there are growing signs that global industrial demand is softening going into the second half of this year. Luna: We've been hearing that from the manufacturing PMIs. China's factory activity has been sluggish, Europe is still in contraction territory. Lucas: Exactly. The latest S&P Global manufacturing PMI for the eurozone came in below fifty again. And China's official manufacturing PMI has been hovering just above the expansion line, but new export orders are weak. That directly hits silver demand because a lot of that metal goes into components shipped around the world. Luna: Meanwhile, gold is still getting that safe-haven bid. You have the geopolitical mess in the Middle East, trade tensions simmering, and inflation still running hot — CPI came in at three thirty-four for May, up from three thirty-two. Lucas: Right. And gold has this dual role: it's an inflation hedge and a geopolitical hedge. Silver has the inflation-hedge aspect, but it's also tied to the economic cycle. When traders worry about a recession, they sell industrial commodities and buy gold. That's exactly the playbook we're seeing this week. Luna: So the gold to silver ratio must be blowing out. Lucas: It is. Gold at four thousand one hundred thirty-seven, silver at sixty-two fifty-eight — do the math and you get a ratio of about sixty-six to one. A month ago it was closer to fifty-five to one. That's a big move in a short time. Luna: Historically, when the ratio spikes above eighty, it's been a buy signal for silver relative to gold. We're not there yet, but we're moving in that direction. Lucas: Right. In 2020, during the pandemic sell-off, the ratio hit over one hundred twenty to one before silver staged a massive rally. I'm not saying we're going that high, but the move we're seeing suggests traders are pricing in a pretty grim industrial outlook. Luna: And yet natural gas is up four point three percent this week. That seems to contradict the recession narrative. Lucas: It does, but gas has its own microfactors. We're entering summer cooling season, and the forecasts are calling for above-average temperatures across much of the US. That drives demand for gas-fired power plants to run air conditioning. Luna: Storage levels are also a factor. The EIA reported a smaller than average injection last week, which caught the market off guard. Lucas: Right. So natural gas is having its own moment, and it's not necessarily contradicting the broader commodity sell-off. It's just that the drivers are seasonal and supply-specific. Luna: Let's come back to silver for a second. Who is actually selling? Is this hedge funds dumping positions, or is it more systematic? Lucas: A lot of it is momentum-driven. Silver has a higher beta than gold — it moves faster in both directions. When the macro sentiment turns negative, silver gets hit disproportionately because the speculative longs run for the exits. The CFTC's commitments of traders report from last week showed that money managers had already been cutting their net long positions in silver futures. That trend likely accelerated this week. Luna: And on the physical side, are we seeing any signs of bargain hunting? I know some retail investors like to buy the dip in silver coins and bars. Lucas: There's always some of that. The US Mint reported strong silver eagle sales in May, but that's a drop in the bucket compared to the futures market. The real question is whether industrial buyers step in at these levels. If you're a solar manufacturer and you need silver for your panels, a twelve percent discount is meaningful. But if you think demand is going to slow further, you might wait. Luna: So the outlook for silver really hinges on the economic data over the next few months. If we get a string of weak manufacturing numbers, silver could fall further. Lucas: Exactly. And the next big data point is the ISM manufacturing PMI for June, which comes out early next week. If that comes in below fifty, it's going to reinforce the narrative that the industrial economy is slowing. Silver could test sixty dollars or even lower. Luna: Meanwhile, gold might hold up a bit better, but it's not immune. Five percent down in a week is still a notable move. If the dollar strengthens or if we get a surprise hawkish tilt from the Fed, gold could break below four thousand. Lucas: The ten-year breakeven inflation rate is at two point twenty-three percent, which is down from the highs earlier this year. That suggests inflation expectations are moderating, which is a slight headwind for gold. But the geopolitical risk premium is still there. Luna: It feels like the commodity complex is in a tug of war between inflation fears and growth fears. And right now, growth fears are winning for the industrial metals. Lucas: That's a great way to put it. Copper is down over four percent this week as well. Six dollars and twenty-one cents a pound. That's a long way from the all-time highs above five dollars we saw a couple of years ago, but it's still elevated historically. Luna: And yet the energy transition narrative supposedly requires massive amounts of copper and silver. How do you square that with the sell-off? Lucas: The energy transition is a long-term story, but markets trade on the next six to twelve months. Right now, the near-term demand outlook is murky. China's property sector is still in the doldrums, and that's a huge source of copper demand. The EV transition is real, but it's not accelerating fast enough to offset the cyclical slowdown. Luna: So the sell-off is cyclical, not structural. That matters for investors who are thinking about buying the dip. Lucas: It does. If you believe the structural demand story for silver — solar, EVs, electronics — then a pullback like this could be an opportunity. But you have to be willing to ride out the volatility. The ratio could go to seventy-five or eighty before it turns. Luna: Speaking of riding things out, I want to mention something that's been on my mind. We do this show every day, and we don't run ads. It's a deliberate choice. We want the conversation to be straightforward, no interruptions. Lucas: Yeah, we keep it ad-free because we think that's the best way to have this kind of conversation. And if you find value in that, there's a simple way to support it. Just go to buy me a coffee dot com slash fexingo. It's not a subscription, no paywalls, just a way to keep the show independent. Luna: Exactly. And we really appreciate the listeners who have chipped in. It makes a difference. Lucas: Alright, back to the commodities. One more thing I want to flag on silver: the open interest in silver futures has been declining, which suggests that the sell-off is more about liquidation than new short selling. That could set the stage for a snap-back rally if sentiment shifts. Luna: So the shorts aren't piling on aggressively — they're just not standing in the way of the sellers. Lucas: Right. And that's a slightly more constructive setup than if we saw a huge build in short positions. But it doesn't mean the bottom is in. We need a catalyst — either a dovish Fed surprise or a strong economic data point — to reverse the momentum. Luna: Or a geopolitical shock that sends everyone back to gold and silver as havens. Lucas: That too. But ironically, a geopolitical shock that boosts gold might not boost silver as much unless it also threatens industrial supply chains. Silver is just more complicated. Luna: It always is. So my takeaway is: silver is getting punished for its industrial exposure, gold is holding up relatively well, and natural gas is doing its own thing. Watch the ISM data next week. Lucas: And watch the gold to silver ratio. If it pushes above seventy-five, I think value-oriented buyers will start paying attention. For now, it's a waiting game.